The Problem with increasing the minimum wage in 2024
The Problem with increasing the minimum wage in 2024.
In April 2024, the government are increasing the UK’s minimum wage from £10.42 per hour to £11.44 per hour. In a cost-of-living crisis for the vast number of people on Minimum Wage, this is great news. It can help them pay their bills, give them breathing room and improve their and their families’ living standards.
But there is a problem, and nobody is talking about it.
To explain let us start with why the minimum wage is REALLY being increased. It is not because the government are kind and want to help people regardless of whatever political spin nonsense you hear. It is because costs have gone up for businesses, for the government and for the UK economy.
The Crucial Part is WHY
Why have costs gone up across the board? It started in the Pandemic. Remember everyone being on Furlough? When everyone was paid to stay home. The impact and cost to the economy was enormous. It created a big pool of debt. A huge bill. And someone has to pick up that bill. And that is where the taxpayer comes in. The taxpayer is not just individuals, but companies too.
This bill paying process had knock on effects. Employers took out cheap government financing to keep them afloat that they must pay off. To do so they must increase their prices. But because of knock on global supply chain issues from Covid policies and wars this led to having to inflate their prices where demand was. This led to supply chains being inflated across the board. And this then led to inflation creeping up. Finally, this lands at the doorstep of the individuals who did not have much money in the first place. The government needs their money back to get the economy growing again. And their money is tax money.
How do you increase tax income
How does the government increase tax income? If prices go up the government will make more money from VAT. But if inflation increases because of interest rate increases used to secure the value of the pound that means the value of that VAT money decreases. And if you owe debt like the government does, or want to borrow money, high interest rates mean it will cost you more to do so. Therefore, the outcome is the government needs to borrow even more money because it is worth less due to high interest rates, but by doing so you increase the cost of borrowing money because interest rates are so high in the first place.
What is the solution?
The solution is you take the money from someone else’s pocket. If it were a Mafia organization we would call it protection money, fraud, or robbery. However, the government does not like terms like that. So here is their strategy and you can see it in plain sight.
You get companies to increase their prices, so you make more VAT. You then force them to pay staff more money by increasing the minimum wage and because of a tight labour market they need to be increasingly competitive in terms of the salaries they pay staff. However, you ignore the fact that you should review the 40% tax bracket and things like the £12,700 personal tax allowance despite inflation meaning that those figure in the real world are not fair to employers and take the increase tax benefit as a result to solve your debt problem.
To combat these cost increases companies must increase their prices meaning more tax income for the government. But because of inflation caused as a biproduct of this tactic the value of the pounds made by the increase VAT and PAYE income is offset anyway.
The Result
In April 2024 minimum wage will be £11.44 per hour. In March 2022, just 2 years earlier it was £8.91 per hour. That is a 22% increase in 2 years. In 2012 minimum wage was £6.19. Compare that to 2022 that is a 30% increase in 10 years. To clarify, in just 2 years minimum wage has increased only a little less than the previous decade combined. That is not great for employers.
The outcome is employers are now having to pick up the tab from increased wages, increased tax (because employers duplicate the PAYE employees pay) and increased costs meaning profit margins are squeezed. And to combat this what a company does is look to where it can reduce costs. Typically, this involves getting rid of employees who you do not need as much. IE minimum wage employees. And what makes it easier is that AI and automation can do those people’s jobs for a fraction of the price. And this is a pattern that is now well on its way.
And that is why Minimum Wage increases this time around are not great.